The allocation policy between two vehicles is written before the second vehicle exists.

A manager with one fund allocates nothing, because every position it finds goes to the fund it has. A manager with two funds whose policies overlap decides, for every position, which fund takes it, how much, and whether the other takes the rest, and the decision is a conflict: the manager's economics differ between the two funds, the funds' registers differ, and a position allocated to one is a position withheld from the other. Each regime requires the decision to be made under a written policy, applied in a record, and each register expects to have seen the policy before it subscribed. The policy is written before the second vehicle exists because the first vehicle's register subscribed to a manager with one fund and is entitled to know, at the second fund's first close, how the manager will divide what it finds. A policy written at the first conflict is a policy written for that conflict.

This note sets out when the conflict arises, the forms the policy takes, the rule of priority and the rule of proportion, the exclusions and the successor-fund term, the co-investment and parallel vehicles as a third claimant, the record of each allocation, the committee's reading at each fund, the manager's economics as the conflict's source, the lender's reading, the onshore interface, a comparison, a worked allocation as a type, cases, what each party holds, the sequence, questions, terms and what to read.

When the conflict arises

The conflict arises when two vehicles the manager controls could each take a position. The obvious case is a successor fund raised while the first fund's investment period runs. Less obvious cases: a separate account for one investor with the same strategy; a co-investment vehicle with capacity; a platform in one jurisdiction and a fund in another with overlapping geography; a fund and the manager's own balance sheet; two funds with different strategies that meet at a position both could hold. The policy names every vehicle the manager runs and says, for each pair, whether their policies overlap and how overlap is resolved.

The forms of policy

A policy of priority gives one vehicle the first call on positions of a kind: the earlier fund until its investment period ends or it is substantially invested, then the later. A policy of proportion divides each position between the vehicles by their available capital, their remaining investment period, or a stated ratio. A policy of rotation offers positions to the vehicles in turn. A policy of fit allocates by stated criteria: size, geography, stage, concentration limits, remaining term, with the manager's reasoned application recorded. Most policies combine them: priority to the earlier fund during its investment period, proportion thereafter, fit as the override with a record. The form is the policy's mechanism and the register reads it for which vehicle it favours.

Why the policy precedes the vehicle

The first fund's register subscribed to a memorandum that described one fund and a manager that ran it. The regime expects that register to know, before the manager's attention is divided, how the division will run. A policy written when the second fund is raised is written by a manager that needs the second fund's first close and has that fund's anchor in the room; a policy written at the first fund's close is written by a manager with one register to satisfy and no second anchor to please. The first fund's committee reads the policy before the second fund exists and accepts it as the first fund's protection, and the second fund's anchor subscribes knowing the rule that will govern it. The order is the regime's expectation and the first register's bargain.

The policy also precedes the vehicle because the first fund's constitution carries the successor-fund term, and the term's operation is the policy's priority rule. A constitution drafted without the policy in view has a term the policy must later fit, and a policy drafted without the constitution has a rule the term may contradict. They are drafted together at the first close.

The stages of two funds' lives

Two funds with overlapping policies pass through stages, and the policy's rule changes with them. While the first fund's investment period runs and the second has not closed, the first takes everything. When the second closes, the first's period ends under the charge's trigger, or continues if the constitution has no trigger, and the policy's priority rule ends or continues with it. While both are investing, proportion runs. When the first is substantially invested and holds reserves for follow-ons, the policy says whether follow-on positions in the first fund's portfolio companies go to the first fund alone, which they should, and whether new positions go to the second alone. When the second's investment period ends and a third is raised, the stages repeat. The policy is written for the stages, and the record shows which stage each allocation was made in.

The follow-on

A follow-on investment in a position the first fund holds is the first fund's, under most policies, because the first fund's register bears the position's risk and holds its upside, and a follow-on taken by the second fund would give the second fund a share of the first fund's work. The first fund's reserves for follow-ons are the policy's input, and a first fund without reserves has a follow-on the second fund takes by exclusion. The policy names the follow-on rule because it is the allocation the first fund's committee reads first.

Priority and the successor-fund term

The successor-fund term in the first fund's constitution prohibits the manager from raising a fund with an overlapping policy until the first fund's investment period ends or it is substantially invested, and the allocation policy's priority rule is the term's operation. A first fund without the term has a manager that may raise the second at any time, and the policy's priority rule is the first fund's only protection. A first fund with the term has a manager whose second fund's first close ends the first fund's investment period under the charge's trigger, and the allocation conflict is short. The two terms are drafted together.

Proportion and its inputs

A policy of proportion divides by inputs the record must show: each vehicle's available capital at the allocation date, its concentration limit for the position, its remaining investment period, and any exclusion. The inputs are facts the administrator holds, and the record carries them. A proportion computed on available capital favours the vehicle with more undrawn commitments, which is the later fund; a proportion computed on remaining investment period favours the earlier. The policy says which, and a register that reads the inputs knows which vehicle the rule favours at each stage of the two funds' lives.

Exclusions

The policy excludes positions a vehicle cannot hold: by its policy, its concentration limits, its regulatory restrictions, its register's excuses, its term. An exclusion is applied before the rule, so that a position one vehicle cannot hold goes to the other without the rule running. The exclusions are the policy's escape, and a manager that excludes by discretion has a policy that allocates by discretion; the exclusions are by reference to each vehicle's constitution and are recorded with the constitutional reason.

The disposal across vehicles

A position one fund holds and the other wants is not allocated; it is sold, and a sale between two vehicles the manager controls is a related-party dealing at each, under each constitution's process, with an independent opinion as the terms test. The allocation policy says so, to keep the manager from treating a transfer between funds as an allocation under the rule, and the record of the disposal is the related-party record at both funds rather than an allocation record. The two processes are kept apart because they answer different questions: which vehicle takes a new position, and at what price one vehicle sells to another.

The third claimant

Co-investment vehicles and parallel vehicles claim positions too. A co-investment vehicle takes what the fund cannot, under the co-investment policy, and the allocation policy says that the fund's share is fixed first and the co-investment's after. A parallel vehicle invests alongside the fund in everything, pro rata, and the allocation policy treats the fund and its parallel as one claimant. A separate account for one investor is a vehicle with its own priority or proportion, and an investor that holds both the fund and the account has a position on each side of the allocation, which the committee reads.

The disclosure in each memorandum

Each fund's memorandum describes the policy: the vehicles it covers, the rule at each stage, the follow-on rule and the record. The second fund's memorandum tells its prospective holders that the first fund has priority until a date or event and proportion after; the first fund's memorandum, written when no second fund existed, told its holders the rule that would apply when one did. A memorandum that says the manager has an allocation policy available on request has disclosed the policy's existence and not its rule, and a prospective holder that does not request it subscribes without knowing which vehicle the rule favours. The memorandum carries the rule, and the policy carries the detail.

The separate account

A separate account for one investor, with the same strategy as the fund, is the hardest vehicle for the policy because its investor is usually a holder in the fund and the account's terms are usually better for the manager. The policy gives the account no priority over the fund unless the fund's register was told; it divides by proportion or by fit with reasons; and it names the account's investor as a related party on every allocation between the account and the fund where that investor sits on the fund's committee. A fund whose anchor holds a separate account beside it has an anchor on both sides of every allocation, and the anchor abstains on the committee's reading of them.

The record

Every allocation is recorded: the position, the vehicles eligible, the exclusions applied with their reasons, the rule applied with its inputs, the result, and the date and the person who decided. The record is contemporaneous, because a record made at the quarter's end is a reconstruction. The administrator or the manager's compliance keeps the record, and it is the evidence each committee reads and each regulator asks for. An allocation without a record is an allocation the manager cannot show was under the policy, and a regime that requires the policy to be applied reads the record as the application.

The committee at each fund

Each fund's committee receives the policy at the fund's first close and every change to it, and reads the allocation record at each quarter. The committee reads for whether the rule was applied as written, whether the exclusions were constitutional, and whether the positions allocated away from its fund were positions its fund should have had. Two committees read the same record from opposite sides, and a record that satisfies both is a policy that was applied. A manager that changes the policy without both committees' reading has changed the bargain of one register without telling it.

The policy's change

A policy is changed when a vehicle is added, when a stage is reached the policy did not anticipate, or when a committee's reading shows a rule that produced results the rule did not intend. Each change is made in writing, dated, with the reason, and read by every committee before it takes effect; a change that favours one vehicle is a change that vehicle's committee reads as a gift and the other's reads as a loss, and the reasons are what both read. A policy changed by the manager alone, without the committees' reading, is a policy the committees no longer hold, and a regime that expects the policy to be disclosed expects its changes disclosed too.

The manager's economics

The conflict's source is the manager's economics: a higher charge or carry on one vehicle, a fund whose carry is closer to payment, a separate account whose investor the manager is raising from, a successor fund whose first close the manager needs. The policy is drafted to remove the economics from the decision, by rule and by record, and the committee reads each allocation for whether the economics crept back. A manager that allocates its best positions to the fund whose carry is nearest is a manager whose policy was not applied, and the record shows it.

The lender's reading

A capital-call lender to one fund reads the allocation policy for how fast its borrower will draw: a policy that gives the earlier fund priority keeps the earlier fund drawing; one that divides by available capital slows it. A lender to the manager reads the policy for the charge each fund produces. Neither consents to the policy, and both read it.

The onshore interface

Onshore positions in a register jurisdiction are allocated by the same policy, with an exclusion the onshore regime adds: a vehicle whose onshore holding chain cannot hold a position, because the chain's licence or foreign ownership room does not reach it, is excluded for that reason, and the record says so. Two funds with two onshore chains in the same jurisdiction may each hold a position and the policy's rule runs; two funds of which one has no chain there have an exclusion before the rule.

By form · by effect	How it allocates	Whom it favours	What the record shows
Priority	First call to the earlier fund during its investment period	The earlier fund	The period's status
Proportion by available capital	By undrawn commitments	The later fund	Each vehicle's available capital
Proportion by remaining period	By time left to invest	The earlier fund	Each vehicle's period
Rotation	In turn	Neither, over time	The turn
Fit	By stated criteria with reasons	The manager's reasoning	The criteria applied and the reasons
Combined	Priority, then proportion, fit as override	As the stages run	All of the above

An allocation, as a type

A manager with a first fund in its third year and a second fund at first close has a policy written at the first fund's first close: priority to the first fund until its investment period ends, which the second fund's first close triggers under the charge's term; thereafter proportion by available capital with exclusions by constitution and fit as an override with reasons; co-investment after the fund's share; the manager's own balance sheet excluded from overlapping positions. A position is found in the month after the second fund's first close. The record shows: both vehicles eligible; the first fund's investment period ended on the second's first close; proportion by available capital, with the inputs from the administrator; the first fund's concentration limit caps its share below its proportion; the remainder to the second fund; the co-investment offered on the first fund's share under its policy. Both committees read the record at the quarter and neither asks.

The structure paper's page

The structure paper carries a page on allocation: the vehicles that exist and may, the rule at each stage, the follow-on rule, the exclusions by constitution, the fit criteria, the record's form and its keeper, the committees' reading, the disclosure in each memorandum, and the successor-fund term's interaction. The page is written at the first fund's design so that the constitution and the policy are one design, and it is the page compliance runs the record from.

The platform and the fund in one jurisdiction

A manager with a development platform and a fund in the same jurisdiction has two vehicles whose policies meet at positions both could hold: a parcel the platform could develop and the fund could hold for income, a building the fund could buy and the platform could reposition. The policy names the overlap and resolves it by fit: development to the platform, standing assets to the fund, with the record showing the reasons for positions that could go either way. The two committees read each such allocation from opposite sides, and the platform's affiliated developer, if there is one, makes each platform allocation a related-party matter as well.

The second fund's reading

A manager's second fund is read against the first fund's allocations, because the second fund's prospective holders are asking how they will be treated when the third is raised. A first fund whose record shows the rule applied at each stage, whose committee read it quarterly and asked nothing, and whose follow-ons stayed with it is a record the second fund's anchor reads as the rule it will get; one whose record was made at quarter's end with reasons that track the manager's economics is a record too. The policy that governs the second fund's relationship with the third is the one the second fund's anchor writes into its letter, and it is the first fund's policy with the first fund's lessons.

Four cases, as types

A manager raises a second fund with no policy and allocates the next three positions to it because its carry is nearer. The first fund's committee reads the annual report, asks for the policy, receives one written that week, and the regulator asks for the record of the three.

A policy of fit without a record lets the manager reason after the fact. Each committee reads allocations its fund lost with reasons the manager supplies at the quarter's end, and neither can show the reasons were not the manager's economics.

A policy written for two funds is not updated when a separate account is opened for the anchor. The account takes positions beside the funds under no rule, and the funds' other holders read the account's positions in the anchor's own report.

A policy written at the first fund's first close, naming every vehicle, with priority and proportion and exclusions and a contemporaneous record, is read by two committees and a regulator over a decade and is changed twice, each time with both committees' reading.

What each party holds

The manager holds the policy, its application and the record.

Each fund's committee holds the policy at its first close, each change, and the quarterly record.

The administrator holds the inputs: available capital, periods, limits.

Compliance holds the contemporaneous record.

Counsel holds the policy's interaction with each constitution's successor-fund term, concentration limits and exclusions.

The lender holds its reading of the drawdown pace.

Where it surfaces

It surfaces at the second fund's first close, when the first fund's committee asks for the policy. It surfaces at the first allocation after it, when the record is made or is not. It surfaces at the follow-on, when the first fund's reserves are read. It surfaces at the anchor's separate account, when the account's positions appear in the anchor's report. It surfaces at the quarterly reading, when a committee sees a position its fund lost and reads the record's reasons. It surfaces at the regulator's inspection, which asks for the policy, the record and the committees' readings. And it surfaces at the second fund's raise, when prospective holders read the first fund's allocations for how the manager treated it.

The cost of getting it wrong

A manager without a policy has allocated by economics, and the first fund's register unwinds nothing because allocation is not a dealing; it has a claim for breach and a regulator that prices the absence. A manager with a policy and no record has a policy it cannot show it applied. A manager with a policy not updated for the separate account has a vehicle outside the rule. Each cost is the register's trust, which is the manager's next raise, and the regulator's finding, which is the manager's standing. The cost of getting it right is a policy at the first close, an amendment for each new vehicle, and a record made the day of each allocation.

The compliance function's part

The manager's compliance function holds the policy's application: it receives each position the investment team proposes, runs the exclusions against each vehicle's constitution, computes the rule's inputs from the administrator's data, records the result and the reasons, and escalates to the committee any allocation the team proposes against the rule. A compliance function that reviews allocations at the quarter's end reviews reconstructions; one that records them at the decision records the decision. The function's independence from the investment team is what makes the record evidence, and the regime reads the function's reporting line for it.

A timeline, as a type

At the first fund's first close the policy is written naming the first fund, the manager's balance sheet, and the kinds of vehicle the manager may raise, with priority, proportion, the follow-on rule, exclusions, fit with reasons and the record's form; the constitution carries the successor-fund term and the charge's trigger. In year two a separate account is opened for a holder and the policy is amended to add it, with the first fund's committee reading the amendment. In year three the second fund holds its first close; the first fund's investment period ends under the trigger; the policy's proportion rule begins; the second fund's committee receives the policy. In year four a follow-on goes to the first fund under the follow-on rule from its reserves. In year five the regulator reads the policy, the record and both committees' quarterly readings. In year seven a third fund is raised and the policy is amended again, read by three committees. The record over the decade is a list, and no committee found an allocation outside the rule.

The sequence

1. The policy is written at the first fund's first close, naming the vehicles that exist and the kinds that may, with priority, proportion, exclusions, fit and the record's form.
2. The successor-fund term in the constitution and the charge's trigger are drafted with the policy's priority rule.
3. Each new vehicle is added to the policy before it takes a position, and each committee reads the change.
4. Each position is allocated under the rule with the inputs and the exclusions, and the record is made that day.
5. Each committee reads the record quarterly.
6. The policy is disclosed in each memorandum and to each regulator.

Questions a manager asks

Must the manager's own balance sheet be in the policy. If it takes positions the funds could take, yes; most policies exclude it from overlapping positions entirely.

What about a position too small for the later fund. An exclusion by the later fund's minimum size, stated in the policy, with the record showing it.

Can the anchor's separate account have priority. Only if every fund's register was told before it subscribed; an account with priority over the fund is a term of the fund's memorandum.

How often is the policy reviewed. Annually by compliance, with each committee reading the review.

Does the policy cover disposals. A disposal by one fund of a position the other could buy is a related-party dealing under each constitution, not an allocation, and the related-party process runs.

What if the two funds are in different regimes. Each regime's rules apply to its fund, the policy satisfies both, and the stricter record standard is used for all.

Terms used

Allocation policy: the manager's written rule for dividing positions among the vehicles it runs.

Priority: first call for one vehicle on positions of a kind.

Proportion: division by stated inputs such as available capital.

Fit: allocation by stated criteria with recorded reasons.

Exclusion: a constitutional reason a vehicle cannot take a position, applied before the rule.

Allocation record: the contemporaneous evidence of each allocation's inputs, rule and result.

What to read

The allocation policy; each constitution's successor-fund term, concentration limits and exclusions; the co-investment policy; the allocation record; each committee's quarterly reading. On this site, the governance room under Where complexity arises, the co-investment room under Structures and the page on our role.